FIRST FINANCIAL PENALTIES IMPOSED ON INDIVIDUALS

1 Market Abuse

Pursuant to section 123 of the Financial Services and Markets Act 2000 (power to impose penalties in cases of market abuse), the FSA has imposed a financial penalty on the company secretary of an AIM listed company.

1.1 Reasons for the action
The financial penalty was imposed as a result of the company secretary's actions when he sold shares in that AIM listed company. At the time he sold his shares, the FSA found that he was in possession of information indicating a significant shortfall in the performance of the AIM listed company's largest subsidiary which would impact on the performance of the AIM listed company.

In his previous share dealings, the company secretary had complied with the company's policy of seeking permission before dealing but did not seek permission on this occasion, the FSA alleging that this was because he knew it would be refused.

The Company secretary then sold his shares on a Friday when he knew of the poor performance of the subsidiary. The following Thursday, a trading statement was released causing the share price to fall to approximately one third of the price it had previously traded at.

1.2 Market Abuse
The FSA found that the company secretary's actions constituted Market Abuse under section 118(1) of the Financial Services and Market Act 2000 in that:

(a) it occurred in relation to shares which were qualifying investments traded on a prescribed market, namely AIM;
(b) it was based on information which was not generally available to those using the market but which if available to a regular user of the market, would be or would have been likely to be regarded by him as relevant when deciding the terms on which transactions in investments of the kind in question should be effected; and
(c) it is likely to be regarded by a regular user of AIM as a failure to observe standards of behaviour reasonably expected of a person in his position relative to the market, the company secretary being a professionally qualified person as well as the company secretary.

1.3 Penalty
As a result of the abuse and in order to maintain confidence in the UK financial system by demonstrating that high standards of market conduct are appropriately enforced, the FSA decided to impose a financial penalty. Having taken into account the effect on the company secretary (who was a professionally qualified person and a number of other circumstances, including the potential loss which was avoided) the FSA concluded that a financial penalty of £20,000 was merited although it was reduced to £15,000 on account of his financial resources and other personal circumstances.

1.4 Conclusion
This is likely to be the first in a number of such actions as the FSA clamps down on such behaviour as the FSA reiterated in the Final Notice that it is enshrined in the Code of Market Conduct (MAR 1.4.3E) that where market users rely on the timely dissemination of relevant information (as in the case of AIM) those who possess relevant information ahead of its general dissemination should refrain from acting up on it. The confidence in such markets depends, in part, on market user's confidence that they can deal with each other on the basis that they have equal, simultaneous information that is required to be disclosed.

2 Breach of the Listing Rules

On 29 March 2004 the FSA, for the first time, used its statutory powers to fine a director of a listed company for being knowingly concerned in the company's breach of the Listing Rules.

2.1 Reasons for the action
The financial penalty for breach of the Listing Rules was imposed on the CEO of a listed company, as a result of a failure to notify the market of a change in the company's performance.

From September to November 2001, the board of directors of the company in question made positive statements that the Company was likely to meet market expectations for the year ending June 2002, estimating a pre-tax profit of £16.1 million. The Management Accounts for November and December 2001, however, showed losses rather than the forecasted profit.

The board of directors did not meet at any time until 25 January 2002 and indeed the last time the board had met was on 17 September 2001, when the budget for the year ending June 2002 had been agreed. During this time the management accounts had not been made available to the non-executive directors.

On 25 January, the board met to discuss the half year performance and it subsequently announced to the market a significantly reduced profit before tax expectation of £9 to £10 million. Following this trading statement, the company's share price fell 60%.

2.2 Notification of a change in a company's performance
The FSA found that the company was in continuing breach of Listing Rules 9.2(b) and 9.2(c), which state that a company must notify the Company Announcements Office without delay of all relevant information which is not public knowledge concerning a change

(a) in the performance of the business; or
(b) in the company's expectations as to its performance;

which, if made public, would be likely to lead to substantial movement in the price of its listed securities.

The FSA found that if the information contained in the November Management Accounts was made known to the market, it would have been likely to lead to a substantial movement in the price of the company's listed securities. This information should therefore have been dealt with without delay and a board meeting should have been convened, in order that an announcement to the market could have been made. The FSA further found that it is not open to listed companies, nor their directors, to refrain from notifying the market of price sensitive information on the basis that the directors believe that the lost ground may still be recovered. It is for the market to assess the company's optimism and the credibility of their increasingly ambitious expectations.

2.3 Penalty
Under Listing Rule 16.2, a listed company must ensure that its directors accept full responsibility, collectively and individually, for the company's compliance with the Listing Rules. The FSA found that the CEO was required to be familiar with the requirements of the Listing Rules and, as he had knowledge of the relevant facts, he was responsible for the company's failure to make an announcement to the market. It had been his duty to fully inform the board of the relevant information and to ask them to consider issuing an announcement without delay.

In failing to comply with the requirements of the Listing Rules, the CEO was knowingly concerned in the company's breach of Listing Rule 9.2 and the FSA therefore imposed a penalty of £45,000 upon him. This penalty was handed out, despite the FSA concluding that the CEO had not set out to deliberately mislead the market, and despite the fact that he had a previously unblemished record as a director.

The FSA also stated that it would have imposed a substantial financial penalty in respect of the company's breach, had it not been for the company's lack of financial resources.

2.4 Conclusion
The FSA regards the continuing obligations of Chapter 9 of the Listing Rules as a fundamental protection for shareholders. The purpose of these requirements is to promote full disclosure to the market of all relevant information on a timely basis, which is essential in maintaining an orderly market in securities. If there is information which, if made public, would be likely to lead to a substantial movement in the price of its listed securities, such information must be disclosed by the company without delay.

It is a director's duty to be familiar with the requirements of the Listing Rules and if they are shown to be responsible for their company's breach of the Listing Rules, they may be held personally liable.

If you require further information on any matter covered in this note, please contact your principal contact at Charles Russell or Simon Gilbert, Katy Knight, Clive Hopewell or Alexander Keepin (London), Francis Rundall or Richard Norton (Cheltenham) or Geoff Sparks (Guildford) and on 0207 203 5000.

Please note that the summaries above are a general indicative guide only. They are not exhaustive. This information has been prepared by the firm as a service to our clients. As it is a general guide, we recommend that you seek professional advice before taking action. No liability can be accepted by the firm for any action taken or not taken as a result of this information. The firm is not authorised under the Financial Services and Markets Act 2000 but we are able in certain circumstances to offer a limited range of investment services to clients because we are members of the Law Society. We can provide these investment services if they are an incidental part of the professional services we have been engaged to provide.